The Sensex & Nifty underperformed the Dow by around 12% in 2016 and also underperformed S&P 500, Nasdaq, FTSE and DAX by a wide margin. Global investors shifted money from emerging equities into US and European equities on the back of a strong USD. USD was the best performing major world currency in 2016 as the Fed raised rates and Trump victory lent optimism to the economy.
Brazil was the best performing equity market in 2016 on the back of an uptick in commodity prices. Read our Commodity Strategy Report for 2017 for analysis and outlook on commodity price movements.
Will the Sensex & Nifty outperform in 2017? The answer is yes as India’s growth is likely to improve on fiscal push by the government, which is cash rich on demonetisation. Improved growth prospects in the global economy too will add strength to the Indian economy on higher trade activity. Read our Equity Strategy Note for 2017 for “Why overweight Sensex & Nifty in 2017?”
Equity Markets in 2016
Early 2016 saw global Equity Markets including Indian Equities got into a negative trend post announcement of Chinese currency devaluation.The trend for the Sensex and the Nifty turned positive after the announcement of the Budget of 2016-17 as the Government targeted a lower Fiscal Deficit of 3.5% of the GDP for Fiscal Year 2016-17. The Equity markets rose post budget with the Sensex & Nifty rising by 15% . The Bond and Currency markets were also happy with the Budget ,bond yields dropped by around 13bps while the INR rallied by over 1%.
Sensex & Nifty were outperforms in the first half of 2016 but then fell back in the second half.
Post announcement of the Indian Budget of 2016-17 and prior to Brexit, Sensex & Nifty rose by 16% and the Dow rose by 8%, which clearly indicated global investors flavour for Indian equities.
Brexit happened on 23rd June 2016 and prior to the announcement of referendum results of Brexit, markets were betting on UK staying in the EU. Post announcement of referendum results, British Pound fell to 30 years’ lows against the USD. Global bond yields plunged with US ten-year treasury yields down 18bps. Sensex fell by 3% and Dow fell by 4%. UK markets witnessed huge selling pressure on 23rd June 2016 mainly due to growth concerns. FTSE nosedived by 6% on 23rd June 2016. Pound dropped as much 11% the night of the referendum, while USD 3 trillion was wiped out from global stocks in the two days after the vote. The Stock markets rebounded but the Pound is still down sharply in 2016.
Click here to read our analysis on Brexit.
Post Brexit, Central Bankers across the world kept rates down and liquidity easy. ECB held its key interest rate at 0% in June 2016 and continued its asset purchase program of 80 billion Euro monthly. Fed held its key interest rate at 0.25%. Bank of Japan held its key interest rate at -0.1% and continued buying back government bonds at a pace of USD 780 billion per annum. RBI held its key interest rate at 6.50%.
Between Brexit and prior to Mr. Donald Trump victory in the US Presidential elections, Sensex rose by 4.3% and Dow rose by 4.36%.
Shares of Germany’s biggest bank and one of the world’s largest lenders fell to its lowest levels in decades in September 2016 after the U.S. Justice Department proposed that Deutsche bank pay USD 7 billion to settle mortgage-securities probe stemming from the financial crisis of 2008. Deutsche Bank decline rippled through financial markets and hit other European banks.
Click here to read our note on Deutsche Bank.
8th November 2016 – An Eventful Day for US and India
After Brexit, the next biggest event of the year was the US Presidential elections. Broadly, global markets had discounted a win for the Democrat nominee Hilary Clinton as pre-election polls had shown a clear majority for her. However voters elected Mr. Donald Trump as 45th President of the US on 8th November 2016. Major global indices fell by nearly 5% during initial trades and volatility indices witnessed sudden spikes. US equity indices then bounced back sharply to record highs, mainly due to the pro-business policies of President elect Mr. Donald Trump, Dow Jones touched record high of 19974 on 21st December 2016, which is very close to the 20K milestone. Post- announcement of US election results, Dow Jones rose by 10.50%, S&P 500 rose by 7.3% and Nasdaq rose by 6.7%.
Click here to read our note on “Dow 20,000 equals Sensex 30,000?”
Prime Minister Mr. Narendra Modi announced demonetisation of 86% of currency notes in circulation on the 8th of November 2016. The demonetisation of Rs 500 and Rs 1000 notes in one stroke would bring currency in circulation back into the banking system. The surprise step was designed to bring billions worth of cash in unaccounted wealth into the mainstream economy. “Black money and corruption are the biggest obstacles in eradicating poverty,” PM Modi said in his speech addressed to the nation. Indian Equity markets reacted negatively on the demonetisation move by the Indian Government as it would slowdown the Indian economy for a short-term period. Post announcement of demonetisation move by Indian Government and US Presidential election results, Indian indices fell from all-time highs. Sensex fell by 2.7% and Nifty fell by 3.3%.
Click here to listen to our Podcast on “Why Demonetisation is Equivalent to India Achieving Independence”
RBI, against all expectations kept rates status quo in its policy meet on the 6th and 7th of December. The MPC (Monetary Policy Committee) unanimously voted to hold the Repo Rate at 6.25%. RBI while acknowledging slowdown in the economy and fall in inflation due to demonetization, chose to hold rates mainly due to concerns over crude price increase and the Fed raising rates in 2017. Markets were expecting a 25bps to 50bps rate cut and have since reacted negatively to the policy decision. Ten year gsec yields rose 13bps post policy while Sensex & Nifty fell by 1%. INR stayed flat. RBI estimates that demonetization will have around 10bps to 15bps effect on CPI while on growth it has revised GDP growth from 7.6% to 7.1% for fiscal 2016-17. Effect on Growth due to demonetization is expected to last a couple of quarters.
Fed hiked rates by 25bps in its FOMC policy meet on the 14th of December and signalled more rate hikes in 2017. Fed cited tight labour market and higher inflation expectations for the rate hike and signalled two to three rate hikes in 2017. The yield on the benchmark 10-year U.S. Treasury note rose by 10 bps to 2.57% levels, marking the yields highest close since June 26, 2015. The S&P 500 index surged to record highs before paring gains post Fed policy meet. The USD too rose to multi year highs. Factoring in all the uncertain events happened globally, US equity indices out-performed all other major indices in the world in the year 2016.
In the commodity space, commodity prices bottomed out in 2016 as markets factored in better growth prospects for the US post Trump victory in November. Eurozone too is witnessing economic recovery, albeit muted while China growth looks to have bottomed out at lower levels. JP Morgan global manufacturing PMI rose tepidly at 1.9% (Y-o-Y) to 52.1 levels.
Brent crude oil started trading on a negative note during first half of the calendar year, it touched USD 28 per barrel in January 2016, which was down by 52% year on year. Tepid demand along with rising supply of oil primarily from OPEC and US kept the crude oil price at lower levels for the year 2016.
OPEC countries agreed to cut the oil production by 1.2 million barrels per day, the first oil production cut since 2008, in a bid to tackle over-production and prop up oil prices. Post -announcement of the deal crude oil price rose by 10% and is trading at 52-weeks high of USD 56 per barrel. Indonesia has withdrawn its OPEC license as it did not agree to cut the production of oil.
Spot gold prices have increased by 7.2% (YTD) to USD 1137 per ounce in 2016, prices touched a high of USD 1375 per ounce in the month of July. In the first half of the year, conditions were not favourable for a rate hike by the US Fed, hence the dollar index was weakening. However, in the second half the year, good economic data and hawkish indications from the Fed affected gold prices. Interest of investors in gold is tepid when interest rates go up. According to World Gold Council, consumer demand declined by 28% during the quarter ended 30th September. The US Fed has signalled more rate hikes in 2017, which is not a good sign for gold prices.